Households appear to be holding up well against the current headwinds, with retail spending up over 10% y/y in May. While a moderation in growth is inevitable over the coming months, as the headwinds to spending begin to bite, the combination of further scope for the savings rate to fall (it is still comfortably above pre-COVID levels) and the excess savings buffer should underpin continued positive momentum through the rest of 2022 and into 2023.

The latest data also suggests that other parts of the economy are also holding up. Capital expenditure by businesses is projected to hold up over the next twelve months. And while some parts of government spending are likely to fall back, as pandemic spending unwinds and the new government implements the now-flagged spending reductions in their October budget, other parts are set to see further increases. There is a significant amount of infrastructure construction activity still in the pipeline, expenditure on defence is set to rise sharply, and health and social care (particularly aged care) are likely to be net beneficiaries in the next budget.

Overall, the outlook remains positive, and it is appropriate for the RBA to continue with further policy rate normalisation.

Moving into 2023, it is likely to become appropriate for the RBA to slow or even pause interest rate rises. The full impact of the monetary tightening implemented in 2022 will not be known until well into 2023, and the Board will need to monitor the data carefully to ensure that they haven’t gone too far, too fast. Their job will also be made easier by a fall back in headline inflation (assuming no further shocks to the global economy), as the pace of increase of food, fuel and other commodities falls back sharply from early 2023 onwards. Indeed, there is a risk that the Board have to reverse some of the rate rises they will have implemented in late 2023/early 2024, if momentum slows too much or even turns negative.